Decisions 2003: Rates

November 1, 2002

Traditionally, trucking companies have geared their prices to what the market could bear. Since deregulation, that market has been lean.StatsCan reports show just how depressed trucking rates have bee...

November 1, 2002
by
Bonnie Toews

Categories

Traditionally, trucking companies have geared their prices to what the market could bear. Since deregulation, that market has been lean.

StatsCan reports show just how depressed trucking rates have been through the1996-2000 period of record growth for the Canadian economy. For example, although the trucking business grew by an average of 6.9% from 1996 to 2000, the price that for-hire carriers were able to charge shippers for their transportation services actually declined 0.5% (in real terms) over the same period. Rates on domestic runs fared the worst, declining 3.2% (in real terms) during the 1996-2000 period.

That inability to raise rates has created a particular challenge for carriers because they seem to have squeezed out as much as they can from their drives towards greater efficiencies. Their labor productivity did increase 2.1% from 1996 to 2000, but that’s significantly lower than the 4.3% productivity increase they posted from 1991 to 1996. And their productivity index for equipment was actually negative during 1996 to 2000. Overall, productivity in the trucking sector increased 1.6% from 1996 to 2000, which is no better than the efficiency gains made between 1991 and 1996. In comparison, trucking’s main modal competitor, rail, improved its productivity 4.2% from 1991 to 1996 and 4.4% from 1996 to 2000.

Based on this background alone, motor carriers need to raise their rates, but shippers challenged to run squeaky tight supply chains have not readily accepted paying higher rates for transportation – until this past May, June and July that is, when shippers were actually having a tough time moving their freight, observes Jim Davidson, President of iWheels International, a buyer of transportation services.

Lack of drivers, owner-operators, and equipment, led to this shortage of capacity, explains Sam Barone, a consultant who once chaired the Canadian Trucking Human Resources Council and is President of the Ottawa-based Transportation Partners International. “In boom times, sometimes you can’t accommodate everybody because equipment is parked.”

Four things are affecting reduced equipment:

Line ups and delays picking up freight from railcars at CN and CP container terminals.

Long hold ups at cross-border points.

Bankruptcies of trucking companies.

Broken equipment not being replaced.

John O’Brien, CEO of Team WorldWide, reports that truckers parked in backed up lines during delays at CN and CP container terminals are not able to use that equipment on other routes and, at the same time, are seeing their costs rising because they have to pay their drivers for the time spent waiting. This reduces capacity within the Windsor-Montreal corridor.

Davidson also notes many trucking companies are not replacing broken equipment. “Rather they are using old equipment to see them through. Shortage of capacity doesn’t seem to be affecting east-west lanes in Canada the way cross-border traffic is because quite a number of U.S. carriers have opted out of coming to Canada.”

“September 11, 2001, has become the defining point for everyone,” he explains. “Increased security at Canada-U.S. borders since the terrorist attacks has disrupted business as usual. Sometimes, drivers and equipment sit for three or four hours -even six to eight hours – on a regular basis crossing the border each way, and they haven’t recovered any of these costs from their shippers. While their equipment is parked at the border, they lose capacity as well, so U.S. carriers are putting their equipment on east-west and north-south lanes in the U.S. and avoiding the aggravation of carrying north-south transborder freight to and from Canada.”

But capacity is not the only issue affecting rate structures today, comments Barone. He lists these as well:

Costs to harmonize systems with bilateral trading partners according to new Customs regulations.

Barone says, “Contractual rates or long-term arrangements don’t normally change through the duration of the agreement, so these rates remain fixed. Surcharges for fuel, insurance, technology, security and now AMPS penalties are a different issue.” Since October 7, 2002, carriers as well as shippers have been fined for contravening Customs regulations and programs under the Administrative Monetary Penalty System.

Lisa MacGillivray, President of the Canadian Industrial Transportation Association, says that CITA members have been fair about paying surcharges. “When the CITA surveyed shippers at the height of the fuel bill controversy, there wasn’t one member who responded who was not paying the surcharge,” she says.

Barone adds, “Some carriers are going after certain sectors and offering a bundle of value-added services. These services tend to be more expensive than just freight transportation – especially logistics, warehousing, Internet-based tracking, and a whole gambit of product line. The more value-added services carriers add, the more they can justify their new freight rate structure. All systems being developed to facilitate border crossings to comply with government-mandated conditions are definitely going to add to the cost of doing business.”

For the carriers under pressure to raise rates because they’re hauling freight for industries dependent on cross-border trade, such as steel, auto or food companies, MacGillivray advises: “If carriers want to reopen their rates, they should sit down with their customers, and talk to them about it. Don’t open the discussion presenting an industry average out of a freight bureau. Shippers want to hear about your particular situation. Explain how your costs are increasing and how it affects your operation.”

There is another issue connected to transborder business, Barone adds. “Americans see this as a security issue; Canadians look at this as a trade and access-to-market issue. Let’s face it. If we want access to that market, our processes have to be streamlined to harmonize with our bilateral trading partners there. Customs and Immigration demands are not going to change – they’re going to get worse.”

Overall, in the medium to long-term forecast, experts in the trucking industry agree the overall percentage of transportation costs will increase. “In the short term,” says Barone, “people are still adjusting; the days of waiting to see are gone. But, to say that the trucking industry will see a general increase in freight rates is a bit misleading,” he cautions.

“Spot rates seem to be going down, while the days of specific lane rates are gone. Different segments of sectors are demanding value-added services – carriers are starting to cater to that more so by sector as opposed to carrying skids from Toronto to Montreal, which you can still get fairly cheap. So, it’s the value-added packages, surcharges and added costs of complying with government mandates that are going to be the key factors influencing rates over the next five years.”

And from the shippers’ point of view? Well, for the first time, they recognize they are not driving market rates. “If shippers can’t move goods, they can’t sell goods, and a reduction in sales trickles down through the entire economy. No one wins,” says Davidson.

“Everyone has become hostage to securing our borders and complying to government standards,” concludes MacGillivray. “Because the shippers’ end responsibility is to get their goods moving, they are open to renegotiating rates with carriers, as long as both sides apply common sense.”